During the past couple of months, bond investors have been handsomely rewarded. The iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) is up 14% since the beginning of March... not bad for one of the markets safest asset classes.
But all good things must come to an end... and it looks like that point could be rapidly approaching for bond investors -- at least in the short-term.
Take a look at the chart below...
The chart above shows the yield on the 10-year Treasury note. As you can see, after bottoming out below 1.4% in late July, yields have been moving steadily higher lately. They've also been forming a series of higher highs and lower lows... a bullish indicator for the trend in motion.
As interest rates rise, your bonds start to lose value. That's because investors aren't willing to pay as much for your old bonds that yield less when they can buy a new bond with a higher interest rate.
We've yet to see if this is just a short-term change in momentum or the beginning of a trend reversal. But it would be wise to cash in on some of your gains in bonds right now.
Risk to Consider: Bonds have been one of the best performing assets of the last three years. Betting against them at almost any point during that period has proven to be a mistake. With the Federal Reserve pledging low interest rates through at least 2014, yields could stay depressed for quite some time.
Action to Take --> Rising interest rates are one of the biggest threats to your fixed-income holdings. If bond yields continue to creep higher, then it could wipe out the majority of the gains you've made this year.
It might be wise to take some of your gains off the table now. Aggressive investors could attempt a short-play -- an ETF like iPath US Treasury ETN (NYSE: DLBS) presents one of the easiest ways to enter a short position.